Why is the Shape of the Laffer Curve for Consumption Tax Different from that for Labor Income Tax?

Kazuki Hiraga and Kengo Nutahara

FinanzArchiv: Public Finance Analysis, 2022, vol. 78, issue 3, 342-361

Abstract: Recent studies find that the Laffer curve for consumption tax is not hump-shaped, whereas the Laffer curve for labor income tax is hump-shaped. This study investigates the cause of the difference in the shapes of two Laffer curves. It is shown that the effect on the relative price of leisure (RPL) with respect to the consumption tax rate is completely different from that with respect to the labor income tax rate. The elasticity of the RPL from an increasing consumption tax rate is at most 1, whereas it can be infinity in the case of labor income tax.

Keywords: Laffer curve; tax revenue; consumption tax; labor income tax; relative price of leisure; Laffercurve; taxrevenue; consumptiontax; laborincometax; relativepriceofleisure (search for similar items in EconPapers)
JEL-codes: E62 H20 H30 (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Why is the shape of the Laffer curve for consumption tax different from that for labor income tax? (2018)
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DOI: 10.1628/fa-2022-0009

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